~ Investment Strategy

Macro Stream

I have just returned from holiday, and in big-picture terms the world is much as I left it. In the US, relatively tight fiscal policy and tightening monetary policy — an error on the part of the Fed — are likely to lead to a worse economic outcome than the equity market is currency discounting. In Europe, austerity remains entrenched and the recovery will be slow and grinding, although that will not necessarily prevent the equity market from going up. In the UK, forward guidance from the BoE has failed to shelter the country from the global rise in interest rates, partly because the BoE has opted for data-based forward guidance (in January, responding to the Fed’s move to data-based guidance, I argued that it would mean more interest-rate volatility than the time-based version, and so it has proved). The Chinese story continues to be dictated by every little tick of the PMIs. Japan is a point of light, although misunderstood: an article in the FT today argues that the BoJ has eased monetary policy, whereas in fact it was Mr. Abe and the whole political class that did so — real rates fell through 2012, and the currency began to move right after the election. Apparently Mr. Abe has still to decide what to do about the sales tax. If he lets the increase happen, that could choke off the country’s nascent economic recovery.

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It’s seems US action on Syria has been put on hold because Mr. Putin has proposed a plan for the destruction of that country’s chemical weapons. The FT has a list of proposed conditions for Syria (from a French draft) here: http://on.ft.com/17REYb8. Mr. Kerry begins two days of talks with Mr. Lavrov today.

I have not focused on the latest Syria issue, because my mind has been elsewhere. But I cannot immediately see the case for missile strikes. What are they supposed to achieve? I suppose the idea is that they would be a slap on the wrist from the world’s policeman. Let’s use that as a model. If the slap is relatively weak, then the child will reoffend if it sees a relatively small gain from so doing. If the slap is strong, the child’s parents (Russia, China) will be affronted, and the gain from deterrence is not obviously larger than the loss from affront. If the slap is hard enough to hospitalise the child, the policeman will have to take responsibility for his care, as in Iraq and Afghanistan.

It would be desirable if parents and policeman were as one on the questions of child-rearing. But they are not. Given that, this Russian plan, and the American response, taken at face value, appear to be an example of the UN security council working as it should work in an ideal world: coming together to work out the best solution to a problem by consensus. Of course there is more than that going on beneath the surface, but even the fact that the players appear to be observing the forms of an ideal world is cause for optimism.